SAN DIEGO – A report released by the San Diego pension system board Friday details how the city racked up a pension deficit estimated at $2 billion, saying the system's underfunding plan did not make sense.

The 240-page report, prepared by the forensic accounting firm Navigant Consulting of Chicago, outlined the now-familiar decisions made by the city and the pension board that led to underfunding of the San Diego City Employees' Retirement System and the current fiscal crisis that grips the city.

The consultants found that city underfunding schemes approved in 1996 and 2002 "did not make economic or actuarial sense" because benefits were increased while contributions to the system were decreased. And they said that the retirement system's annual financial reports contained misleading disclosures, or omitted disclosures regarding the funding of the system.

The report was critical of the lack of independence that existed under the board's old makeup, when a majority of the trustees were allowed to play "dual roles" – not only receiving retirement benefits but also representing union members or holding city management posts.

A legal analysis included in the report found that underfunding schemes and a special benefit given to a former trustee violated Internal Revenue Service codes, and that the 1996 and 2002 funding arrangements were subject to political interference in violation of the state Constitution.

It also found that former retirement administrator Lawrence Grissom failed to disclose information to his board about special benefits being given to board members.

Former trustee Ronald Saathoff was granted a one-time benefit in 2002 that allowed him to combine his salary as a union president with his city salary to determine his ultimate retirement benefit, adding about $2,500 per month to his pension. That benefit is at the heart of the state conflict-of-interest charge against Saathoff in a pending criminal case against him and five other current or former pension system officials.

To ensure the report's independence, trustees did not get a chance to read it before Friday, when consultants gave a formal presentation on their findings to the board.

Pension board President Peter Preovolos said the report was designed to "bring to light any possible past misconduct" and identify areas for reform.

"While it is difficult to receive this kind of information – and believe me it is – I have spent an ungodly number of hours sitting here taking an enormous amount of abuse, trying to come to a conclusion," Preovolos said. "It is important to note this is not the end of the journey for any of us, but that it is just the beginning. We have a lot of work ahead and I, for one, am encouraged that progress seems to be beginning and is being made."

He and other board members praised the consultants for completing the review so quickly. The final bill for the investigation is $2.7 million – a fraction of what the city is paying its consultants for its inquiries, which are taking months longer to complete.

"For me, you've given us a path to go down, a direction," said George Murray, a board member attending his third meeting.

Navigant officials interviewed about 50 people and reviewed 134,000 electronic documents. Among those who declined to be interviewed by Navigant were former City Managers Jack McGrory and Michael Uberuaga and Mayor Jerry Sanders.

Former Mayor Dick Murphy and former City Auditor Ed Ryan were contacted by the firm, but did not respond to its requests.

The $3.6 billion San Diego City Employees' Retirement System began showing cracks in 2002, following the board's approval of a plan to underfund the pension system while increasing employee retirement benefits. That decision was the continuation of a policy that began six years earlier.

Federal and local investigators have been probing the city's financial practices for two years, looking into allegations of securities fraud and corruption related to the pension.

The District Attorney's Office and U.S. Attorney's Office have charged eight people associated with the pension system with criminal charges in separate cases.

On a positive note, the firm said the retirement system has sufficient assets to pay benefits due to all current retirees, about $210 million a year.

"In the short term it looks as though things are OK," said Amanda Massucci, a managing director with Navigant.

It was the first meeting of the pension board since Sanders, who has made restoring the city's finances a priority in his new administration, called for the resignation of Preovolos and five other board members.

Only one has resigned, and Preovolos said he would resign, but only after some early steps toward reform are made.

"I believe it would be a disservice to the city and possibly a breach of my own fiduciary duty to abandon these projects midstream," Preovolos said. "Once these projects are done, I would gladly step aside."